The Dutch government announced last Friday that it was cancelling a proposal to increase the rate of value-added tax by an additional percentage point in 2009.
The government had planned to raise the rate of VAT from 19% to 20% next year to fund a decrease in employee social security contributions (WW), but the coalition government was split over the proposal, and the Finance Ministry has said that the VAT-hike part of the plan has been scrapped after fears that the move would stoke up inflation.
It is reported that the government will forge ahead with its proposal to abolish employee social security contributions, a measure designed to boost the economy, but the decision to cancel the VAT increase has left a EUR2 billion hole to be filled in the government's fiscal plans just three weeks before the budget is due to be announced.
Prime Minister Jan Peter Balkenende explained that the government had dropped the 1% VAT hike to prevent the economy from taking an unnecessary "turn for the worse."
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